The stock market surged to claim a clutch of new records as investors gave the Budget the "thumbs up". The FTSE 100 closed at an all-time high of 5,903.6, up 68.7 points, as sentiment was boosted by a combination of positive economic data.
The reaction in the currency markets, which took sterling two pfennigs higher to above 3.05 German marks and left exporters appalled, ignored figures which showed a dip in retail sales last month and average earnings rising by less than expected.
The Chancellor calmed the markets a little by pointing out that his two Budgets would take pounds 17bn out of the economy over two years. "I don't think anyone can say it is anything other than a prudent stance," he said.
Mr Brown said the outline arithmetic for the Budget had been made available to the Bank of England's Monetary Policy Committee (MPC) when it met in March, and opted to leave interest rates unchanged at 7.25 per cent.
It is no secret that Treasury officials would have preferred the Bank to raise rates enough to be able to signal that they had probably reached a peak. They believe it is the possibility of another increase in the cost of borrowing that is fuelling speculation in the currency markets.
Many City economists agreed yesterday that fiscal policy was already tight, even though the Budget measures were broadly neutral. In a post- Budget circular Goldman Sachs described policy as the toughest since 1981.
Robert Barrie at CSFB said: "The neutral Budget leaves fiscal policy tight and the public finances in good shape."
However, Michael Saunders at Salomon Smith Barney said: "There was more tightening than expected in the 1997/98 fiscal year but there will be less in 1998/99." The squeeze was easing, he said.
Either way, the widespread view that it is now up to the Bank of England to slow down the economy left sterling looking irresistible to dealers. Its index against a range of currencies leapt by 0.7 to 107.5, the highest since the end of 1988.
Roger Bootle, chief economist at HSBC Markets, said: "Our export business is, I think, in danger of being devastated by a pound this high. It is ludicrously overvalued."
Michael Robson, president of the UK Steel Association and commercial director of British Steel, warned, in a radio interview: "It takes you years to get export business, and you can lose that business in two or three minutes."
He added: "This involves a progressive and significant loss of jobs, both inside the steel industry and, I believe, also inside UK manufacturing."
The MPC is due to meet on 9 April. It has been split since January over whether or not to raise rates, with the published minutes showing the vote divided four-four in February. Eddie George, the Governor of the Bank of England, used his casting vote to leave interest rates unchanged.
Ironically, new figures yesterday tended to support the doves. The number of people claiming unemployment benefit fell by 13,700 in February to the lowest since July 1980. Although it was the 24th consecutive fall, the pace of decline has clearly slowed in the past three months.
In addition, the underlying growth of average earnings in the year to January was lower than expected at 4.5 per cent, the same as December. An initial estimate showing an increase in November and December was revised down.
The Office for National Statistics said the actual difference was exaggerated by rounding, and earnings growth had been stable for four months. Hawkish economists argue that pay deals, especially in the private sector, are as high as they can be if the Bank is to meet the inflation target.
Mr Brown warned yesterday of the need for moderation in pay deals. He said: "The performance of the economy this year and next will to a large extent depend on how people who bargain on wages respond."
Additional reassurance that the economy might be slowing as needed to keep inflation on track came from separate figures showing a 1.2 per cent fall in the volume of retail sales last month.
But this followed a surge in January, thanks to price discounting in the new year sales. The underlying trend has changed little, with sales up 5.5 per cent in the latest three months compared with a year earlier.Reuse content